Billionaire investor Bill Ackman has highlighted some lessons he learned from his failed investment in Valeant Pharmaceuticals International Inc. (VRX). (See also: Ackman's Valeant Holdings Lost Pershing $7.7 Million a Day.) 

Hedge fund Pershing Square Holdings revealed in its latest annual report, published March 29 that while the valuations of the companies in its portfolio have been affected by market forces, the drop in its net asset value, or NAV, was due to the fund's investment in Valeant.

Pershing Square reported its main fund lost 13.5 percent net of fees in 2016. That followed a 20.5 percent loss in 2015. The S&P 500 gained 11.9 percent in 2016, while VRX stock lost about 85.3 percent. Pershing said the fund has had a 14.8 percent compound annual net return since it was founded in 2004.

Pershing Square noted that its performance over the last two-year period is the worst in its history, with NAV falling by 13.5 percent in 2016. Net asset value was 18.25 at the end of February.

In his letter to shareholders, Ackman wrote: “Clearly, our investment in Valeant was a huge mistake. The highly acquisitive nature of Valeant’s business required flawless capital allocation and operational execution, and, therefore, a larger than normal degree of reliance on the management.”

Valeant’s trouble started in 2015 when it was alleged that the company's growth at the time was down to a combination of price gouging and a connection with a secret network of specialty pharmacies which the company allegedly used to process fraudulent transactions. Ackman’s hedge fund had acquired shares of Valeant, worth about $3.3 billion, at an average cost of  $196 a share in March 2015, according to the hedge fund’s 2015 annual report. While the Canadian drug company has taken several steps to move past its price-gouging scandal, Pershing Capital recently sold all of its shares in Valeant at a loss, with Ackman saying Valeant still has a lot of work to do. 

Ackman pointed out that he and his team misjudged the ability of previous management team at Valeant, stating this added to his failed investment. He shared lessons he learned from his Valeant investment, including a point that Pershing Square management’s "historic ability to deploy capital in acquisitions and earn high rates of return [was] not a sufficiently durable asset that one can assign a material value to in assessing the intrinsic value of a business.”

Perusing Square will hold its annual general meeting in Guernsey on April 25.